Clarification on issue relating to input duty Cenvat credit admissibility for goods exempted by Notification No. 2/2001-Central Excise dated 27-1-2001 - Central Excise - F. No. 332/1/2001-TRU

F. No. 332/1/2001-TRU Dated 16-2-2001 Government of India Ministry of Finance (Department of Revenue) Central Board of Excise Customs, New Delhi Subject : Clarification on issue relating to input duty Cenvat credit admissibility for goods exempted by Notification No. 2/2001-Central Excise dated 27-1-2001. All goods falling under the First and Second Schedule to the Central Excise Tariff Act, 1985 are exempt from whole of duties of excise leviable under the said Tariff Act and Additional Duties of Excise (Goods of Special Importance) Act, 1957, when donated or purchased out of cash donations for the relief and rehabilitation of the people affected by the earthquake in the State of Gujarat. References have been received stating that, in the case of manufacturer directly donating the goods for quake relief, clearances made under Notification No. 2/2001-Central Excise, do not amount to sale of such goods at the time of their clearance. Therefore the manufacturer should not be required to reverse an amount equal to 8% of the total value of clearance. 2.The CENVAT credit scheme works on the principle that credit of excise duty paid on the inputs is allowed, in relation to final products which are chargeable to excise duty. In other words, the manufacturer is not allowed to take credit of duty paid on the inputs which are used in the manufacture of exempt final products. This is essential feature of the CENVAT scheme and universally applicable without any exception. In the present case, two situations can arise, one the manufacturer sells these goods to a relief agency who purchase the goods out of cash donations and second the manufacturer himself donates the goods for relief and rehabilitation work. In relation to such clearances, the manufacturer has two options, first to maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in the manufacture of exempted goods and take CENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods. The manufacturer, opting not to maintain separate accounts shall follow either of the following conditions, as applicable to him, namely : - (a) if the exempted goods are, - (i) final products falling under Chapters 50 to 63 of the Schedule to the Central Excise Tariff Act, 1985; (ii) tyres of a kind used on animal drawn vehicles or handcarts and their tubes, falling within Chapter 40; (iii) black and white television sets, falling within Chapter 85; (iv) newsprint, in rolls or sheets, falling within Chapter heading No. 48.01, the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs used in or in relation to the manufacture of such final products at the time of their clearance from the factory, or (b) If the exempted goods are other than those described in clause (a) above, the manufacturer shall pay an amount equal to eight per cent of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory. 3. Out of the above two situations of supply, the manufacturer can either maintain separate record or reverse amount equivalent to 8% in the first case i.e. the sale to relief agency who purchase the goods out of cash donations. However, in the second case since there is no sale, the manufacturer cannot avail the option of reversing amount equivalent to 8% of the sale price, and the only option left with him for availing the benefit of the notification is to maintain separate records of inputs, and to not take credit in respect of inputs which have been used in or in relation to the manufacture of the exempt goods. 4. Receipt of this communication may be acknowledged.